Investors seek shelter in storm

THE fear factor has gripped global stock markets wi th volatile commodity and currency movements putting investors in defensive mood and vindicating the old “sell in May and go away, come back on St Leger day” adage.

The FTSE at about 6,000 points is delicately balanced in today’s volatile mood

Despite a partial recovery from the plunge in oil and metals prices and a string of healthy US company results, fund managers’ confidence has been dented by Europe’s unfolding sovereign debt crisis and faltering global economic growth.

The prospect of further moves by China to curb inflation and America ending its temporary quantitative easing policy to kickstart recovery provide further warning signals.

Big investors, cautious on prospects for Europe’s economy for the first time in nearly a year, are pulling money out of resources stocks and switching into traditionally safer havens such as food and drink or healthcare.

And with the FTSE 100 Index delicately poised around the 6,000-point barrier, strategists acknowledge these are testing times for investors looking to increase their exposure to riskier assets.

Evolution’s Philip Isherwood said: “Markets are driven by a mixture of fears, fundamentals and confi dence. We’re being reminded of that now. Risks loom large and fear is clearly winning out over fundamentals. The result is weak equity markets and a rise in volatility.”

A key factor dictating the course of economic growth and the knockon impact on confidence is the direction of oil, which at its recent peak was up 44 per cent on the past year.

Oil and mining shares make up more than a third of the value of Britain’s top 100 quoted companies.

This has led to a “signifi cant headwind” for economic growth, according to Shore Capital strategist Gerard Lane, which in turn has choked off demand.

He warned: “Energy costs may carry on rising with an imbalance between supply and demand driving prices higher.

“We are sceptical over the scale of stated oil reserves from the Middle East and note that domestic consumption

from that region is reducing the availability of oil for the global markets.”

CheckRisk, which provides risk analysis on financial markets, argues the most serious threats are rising oil price volatility, Europe’s debt crisis and a potentially steep downturn in UK house prices as inflation, unemployment and mortgage lending pressures take their toll.

Fund managers appear to be battening down the hatches in the face of such uncertainty with their shift out of cyclical into defensive sectors suggesting the market isunlikely to be galloping towards St Leger day – the last classic of the flat-racing season – in September.